Commodity-Linked Structured Note Sales Slump to Nine-Year Low

Banks are selling the least structured notes tied to commodities in nine years as investors shun the securities amid a slowdown in China’s economy and the prospect of the U.S. Federal Reserve winding down stimulus.

Global issuance in the first half of the year fell to about $2 billion, 41 percent lower than the same period of 2012 and the least since 2004 with securities linked to oil and gold among the biggest losers, according to a report from Barclays Plc. In the U.S., banks sold $689.6 million of the securities in the same period, the lowest since at least 2010, and have added $70.9 million this month through July 30, according to data compiled by Bloomberg.

“Demand for commodity structures is definitely subdued this year,” Richard Couzens, London-based head of investor solutions product origination at Barclays Plc, said in a telephone interview. “All eyes have been on what the Fed will do, the state of the Chinese growth story and geopolitical tensions in Egypt and elsewhere, all of which have driven demand across commodity sectors to varying degrees.”

The value of commodity assets under management dropped by $63 billion in the second quarter, mainly because of investors withdrawing money from gold holdings such as exchange-traded funds, Barclays said. Banks have sold $144.8 million of U.S. structured notes tied to gold this year, down from $424.5 million during the same period last year, as the metal’s price fell 21 percent to $1,331.8 an ounce at 8.30 a.m. in London.

Gold Risks

Gold and silver face the greatest risk of declines among commodities after Fed Chairman Ben S. Bernanke said the central bank may start trimming bond purchases later this year, according to Barclays.

Bernanke rattled markets on May 22 by telling Congress that the Fed may reduce the pace of its $85 billion of monthly bond purchases of Treasurys and mortgage bonds if the economy showed sustained improvement. On July 17 he assuaged investor concern that the central bank would yank stimulus measures, saying that the Fed plans to maintain a “high degree” of monetary accommodation.

While most commodity-tied notes have fallen out of favor, demand for securities linked to West Texas Intermediate crude oil has risen in the past month, Couzens said, after it climbed to an almost 17-month high on an intraday basis earlier in July.

Barclays sold $24.1 million of one-year notes tied to the benchmark on July 17, the largest offering linked to oil since September, Bloomberg data show. Offerings of oil-linked notes total $151.9 million this year compared with $416.3 million in the same period of 2012, Bloomberg data show.

Oil Futures

A pricing condition for WTI futures whereby short-term contracts are more expensive than longer-dated equivalents, known as “backwardation,” has helped push up issuance in July, Couzens said. Backwardation is more pronounced for WTI than for Brent crude, allowing banks to create higher coupons on securities tied to that type of oil, said Jerome Gaudry, the London-based head of commodity structuring at Natixis SA.

Base metals, including copper, will suffer falling demand, Barclays said, as China’s economy grew 7.5 percent in the second quarter from a year earlier, down from 7.7 percent in the first three months. The London-based bank is the only issuer to sell a structured note in the U.S. tied to copper this year, raising $800,000, Bloomberg data show.

The Standard & Poor’s GSCI Index of 24 commodities from corn to natural gas has fallen 2 percent this year to 632.7.

“Many investors typically invest in what they read about in the newspapers, which means gold and oil,” said Ingo Ramming, London-based co-head of commodity solutions at Commerzbank AG. “The developments in gold this year have had a big impact on issuance and investor demand.”